Crypto assets in the UK: When is a tax return due?

Cryptocurrencies Jan 25, 2024

Crypto assets, such as Bitcoin, Ethereum and other cryptocurrencies, have become increasingly popular in recent years as a form of investment, payment, and alternative asset class. However, many crypto investors may be unaware of their tax obligations in the UK or may find the tax rules confusing and complex.

In this blog post, we will try to provide a classification of the distinct types of crypto assets, how they are taxed in the UK and explain when a tax return is due as they are instances where you can avoid having to go through that if your profits and/or proceeds in the tax year are below certain allowances.

What are crypto assets?

Crypto assets are digital tokens that use cryptography to secure transactions and control the creation of new units. They are typically recorded on a distributed ledger, such as a blockchain, that is accessible to anyone on the network. Crypto assets can have distinct characteristics and functions, such as:

Exchange tokens: These are intended to be used as a method of exchange or payment, such as Bitcoin or Litecoin. They do not provide any rights or obligations to the holder, other than the ability to transfer or exchange them.
Utility tokens: These provide access to a current or future service or good, such as Ethereum or Filecoin. They may also have some exchange value, but their main purpose is to enable the use of a platform or network.
Security tokens: These provide rights and obligations like traditional securities, such as shares or bonds. They may entitle the holder to dividends, interest, voting rights or ownership of an underlying asset or business.
Stablecoins: These are designed to maintain a stable value relative to another asset, such as a fiat currency or a commodity. They may use various mechanisms to achieve this, such as backing by reserves, algorithmic adjustments, or collateralisation.

How are crypto assets taxed in the UK?

HMRC does not consider crypto assets to be equivalent to currency or money, and therefore treats them as a traditional asset for tax purposes. In addition, HMRC considers that investing in crypto assets is not analogous to gambling (such that any profits made on investments in crypto assets would not be taxable).

Depending on the nature and purpose of the crypto transactions, they may be subject to either Capital Gains Tax (CGT) or Income Tax (IT). The general principles are as follows:

Capital Gains Tax (CGT):
This applies when an individual disposes of crypto assets that they own as a personal investment. A disposal occurs when the individual sells, exchanges, transfers or gifts their crypto assets to another person. The taxable gain is calculated by deducting the allowable costs (such as the acquisition price and transaction fees) from the disposal proceeds (such as the sale price or market value). The gain is then taxed at either 10% or 20%, depending on the individual's total income and gains for the tax year. The individual can also utilise their annual CGT allowance (£6,000 for 2024/25), which means that any gains below this threshold are tax-free.
Income Tax (IT):
This applies when an individual receives crypto assets as a form of income or reward. This may include situations where the individual:
- Mines crypto assets using their own equipment and resources. Mining is the process of validating transactions and creating new units of crypto assets on a network. The taxable income is calculated by deducting any allowable expenses (such as electricity and depreciation) from the market value of the mined crypto assets at the time of receipt.
- Stakes crypto assets on a network. Staking is the process of locking up some crypto assets on a network to participate in its governance and security and receiving rewards for doing so. The taxable income is calculated by deducting any allowable costs (such as transaction fees) from the market value of the staked crypto assets and rewards at the time of receipt. - Receives crypto assets from their employer as a form of remuneration or benefit. The taxable income is calculated by using the market value of the crypto assets at the time of receipt.
- Receives crypto assets from an airdrop. An airdrop is when new units of crypto assets are distributed for free to existing or potential holders. The taxable income is calculated by using the market value of the airdropped crypto assets at the time of receipt.

The income from crypto assets is then taxed at the individual's marginal rate of IT, which can range from 0% to 45%, depending on their total income for the tax year.

When is a tax return due for crypto transactions?

An individual who has made any taxable transactions involving crypto assets in a tax year must report them to HMRC by filing a Self-Assessment tax return. The deadline for filing online is 31 January following the end of the tax year (which runs from 6 April to 5 April). For example, for the tax year 2022/23, the deadline is 31 January 2024. The individual must also pay any tax due by the same date.

The individual must keep accurate and complete records of all their crypto transactions, including the dates, amounts, values, costs, fees and purposes of each transaction. They must also keep evidence of the transactions, such as receipts, invoices, wallet addresses, exchange rates and screenshots. These records must be kept for at least five years after the 31 January deadline.

Conclusion

Taxation of crypto assets in the UK can be complex and challenging, especially given the volatility and diversity of the crypto market. It is important for crypto investors to understand their tax obligations and comply with them in a timely and accurate manner. Failure to do so may result in penalties, interest and enquiries from HMRC.

In summary, a return will be needed if capital gains, including any arising from transactions in crypto assets, exceeded £12,300 (that's for the 22/23 tax year but keep in mind that this allowance is scheduled at the time of writing to decrease to £6,000 in 23/24 and further down to £3,000 in 24/25), or if aggregate disposal proceeds for the tax year exceed 4 times the allowance (even if you make no taxable gain). Obviously, if you made transactions that attract income tax you will need to do a tax return as well. HMRC also reminds us that it's not just selling that we need to monitor and that you should check if you have made any of the following type of transactions involving crypto assets: